Landlord and tenant — Lease — Beer supply agreement — Whether agreement prohibited by and void under Articles 85(1) and (2) of European Union Treaty — Whether prohibition and voidness only temporaneous with relevant circumstances
The plaintiff held a tenancy of a public house
under a tenancy granted by the second defendant (IPCL) upon the terms of a
draft lease annexed to a surrender and agreement to lease dated 10 February
1992. The draft lease contained a tie requiring the tenant to purchase
specified beers from a defined category of companies, and from no other
persons. In July 1992 IPCL, which owned some 4,500 public houses let on terms
that included a tie similar to that in the plaintiff’s tenancy, notified the
Commission of the European Union of the standard lease and sought a declaration
that the provisions of Article 85(1) did not apply to the lease. Following the
introduction of a new standard lease, IPCL withdrew its notification in October
1997. Meanwhile, in February 1993, the first defendant became the plaintiff’s
immediate landlord. The plaintiff issued proceedings claiming that, following
the withdrawal of the notification, the tie was unenforceable and he was free
to purchase beer from other sources; he also claimed damages. The first
defendant sought, by counterclaim, damages for breach of the tie and an
injunction. On an application by the first defendant, Laddie J struck out the
plaintiff’s claim and gave judgment on the counterclaim. On the plaintiff’s
appeal, the question in issue was whether, on the assumption that the tie in
the lease was prohibited under Article 85(1) for so long as IPCL was the
landlord (because of the size of its estate), and therefore void under Article
85(2), the tie remained void after the first defendant became landlord.
dismissed. An agreement that is prohibited by Article 85(1) at the time it is
entered into, because it has the effect of preventing, restricting or
distorting competition in the circumstances prevailing in the relevant market,
may subsequently, as a result of a change in those circumstances, fall outside
the prohibition because, in the changed circumstances, it no longer has that
effect. If the prohibition in Article 85(1) is temporaneous, then so is the
nullity in Article 85(2). The prohibition against the tie in the plaintiff’s
lease ceased when the first defendant acquired the reversion to the tenancy.
The concept that nullity under Article 85(2) is temporaneous or transient is in
no way inconsistent with the operation of the scheme of notification.
The following cases are
referred to in this report.
Brasserie de Haecht v Wilkin (Case 23/67) [1967] ECR 407
Brasserie de Haecht v Wilkin (No 2) (Case 48/72) [1973] ECR 77; [1973] CMLR 287,
Eur Ct
Delimitis v Henninger
Bräu AG [1991] ECR I-935; [1992] 5 CMLR 210
Gibbs Mew plc v Gemmell
[1999] 1 EGLR 43; [1999] 01 EG 117; [1998] EuLR 588, CA
Shell UK Ltd v Lostock
Garage Ltd [1976] 1 WLR 1187; [1977] 1 All ER 481, CA
Société de Vente de Ciments et Bétons de
l’Est SA v Kerpen & Kerpen GmbH & Co
(Case 319/82) [1983] ECR 4173
Société Technique Minière v Maschinenbau Ulm GmbH (Case 56/65) [1966] ECR 235
This was an appeal by the
plaintiff, David John Passmore, from a decision of Laddie J, who had allowed an
application by the first defendant, Morland plc, to strike out the plaintiff’s
claim, and given judgment on the defendant’s counterclaim in proceedings by the
plaintiff for a declaration and damages against the first and the second and
third defendants, Inntrepreneur Pub Co Ltd and Inntrepreneur Beer Supply Co
Ltd.
Gerald Barling QC and Mark Brealey (instructed by
Maitland & Walker, of Minehead) appeared for the appellant; Nicholas Green
QC and Aidan Robertson (instructed by Kimbell & Co, of Milton Keynes)
represented the respondents.
Giving judgment, CHADWICK LJ said: This is an appeal from an order made on
10 July 1998 by Laddie J striking out the plaintiff’s claim against the first
defendant, Morland plc. The appeal raises a question of some importance in the
application of Article 85 of the EC Treaty to tied houses. The question may be
stated shortly: whether a beer supply agreement which, as between the original
parties, was prohibited by Article 85(1) and so automatically void under the
provisions of Article 85(2), may, nevertheless, be enforced by an assignee from
one party in circumstances in which, if an agreement in identical terms had
been entered into between the assignee and the other party at the time of the
assignment, that agreement would not have been prohibited.
Introduction
The facts are not in dispute. The plaintiff, Mr
David Passmore, is the tenant of a public house in Aldershot under a tenancy
granted by the second defendant, Inntrepreneur Pub Co (CPC) Ltd (then known as
Inntrepreneur Estates (CPC) plc and, hereafter, IPCL), upon the terms of a
draft lease annexed to a surrender and agreement to lease dated
10
1
schedule, a tie requiring the lessee to purchase from the company (a term that
is defined to mean IPCL, its successors or assigns) or its nominees (meaning
Courage Ltd), and from no other person, all such specified beers as he shall
require for sale in the demised premises.
On 29 July 1992 the reversion expectant upon the
determination of the term of years granted was transferred by IPCL to Morland
Brewery Estates Ltd. On 5 February 1993 Morland Brewery Estates Ltd granted a
lease of the reversion to the first defendant, Morland plc (then known as
Morland & Co plc and, hereafter, Morland). At all times thereafter Morland
has been the plaintiff’s immediate landlord.
IPCL was formed in 1991 as a joint venture between
Fosters Brewing Group and Grand Metropolitan plc. At the time when the tenancy
was granted in 1992, IPCL was the owner of some 4,500 on‑licensed
premises. Those properties were let on terms that included a tie that was in
the same, or substantially the same, form as that in the plaintiff’s tenancy.
On 1 July 1992 IPCL notified its standard form lease to the Commission of the
European Communities, pursuant to Article 4 of Council Regulation 17, and
sought a declaration, pursuant to Article 85(3) of the EC Treaty, that the
provisions of Article 85(1) were inapplicable. On 30 July 1993 the commission
published a notice pursuant to Article 19(3) of Regulation 17. On 14 October
1997 IPCL, following the introduction in January 1997 of a new standard form
lease for its own tenancies, withdrew the notification that had been made in
1992.
On 16 December 1997 Mr Passmore, through his
solicitor, wrote to Morland. The letter referred to the withdrawal by IPCL of
its notification under Article 4(1) of Regulation 17, and continued:
We have been informed by the Director General for
Competition at the EC Commission that the reason for the withdrawal was that
Inntrepreneur was advised by the European Commission that the Company would not
get the Article 85(3) individual exemption which it sought in respect of those
beer ties. The Commission informed Inntrepreneur that either its application
had to be withdrawn or a statement of objection to the effect that the tie
infringed Article 85(1) and was not eligible for an exemption would be issued.
Rather than face an adverse decision,
Inntrepreneur has chosen to withdraw its notification which means that the beer
tie contained in the standard Inntrepreneur 20 year lease granted prior to 1
January 1997 is void ab initio and remains so irrespective of the
identity of the owner of the freehold reversion.
You will appreciate that our client has such a
lease and that the lease tie remains invalid notwithstanding the acquisition of
the freehold reversion by your company. Our client has a responsibility to
comply with European Competition Law and at the time to mitigate the loss which
he has suffered
significantly less popular with his customers than alternative beers available
in the free market and also having to buy beer at significantly higher prices
than would be available in the free trade.
Accordingly, we are instructed to advise you that
our client has taken the view that the tie is unenforceable and reserves the
right to buy beer products from whomsoever he pleases with immediate effect.
Following that letter, Mr Passmore gave effect to
his expressed view that the tie was unenforceable by obtaining and selling beer
from sources other than Morland.
Article 85 of the EC Treaty
Article 85 of the EC Treaty is in these terms, so
far as material:
85(1) The following shall be prohibited as
incompatible with the Common Market: all agreements between undertakings,
decisions by associations of undertakings and concerted practices which may
affect trade between Member States and which have as their object or effect the
prevention, restriction or distortion of competition within the Common Market…
(2) Any agreements of decisions prohibited
pursuant to this Article shall be automatically void.
(3) The provisions of para 1 may, however, be
declared inapplicable in the case of:– any agreement or category of agreements
between undertakings;…
which contributes to improving the production or
distribution of goods or to promoting technical or economic progress, while
allowing customers a fair share of the resulting benefit, which does not:
(a) impose on the undertakings concerned
restrictions which are not indispensable to the attainment of those objectives;
(b) afford such undertakings the possibility of
eliminating competition in respect of a substantial part of the products in
question.
These proceedings
Mr Passmore commenced the present proceedings by
the issue (or reissue) of a writ on 24 February 1998. By his amended writ and
statement of claim he claimed, inter alia, damages for breach of Article
85(1) and restitution of sums alleged to have been unlawfully charged by
Morland. On 17 March 1998 Morland sought, by way of counterclaim in the action,
damages for breach of the tie and an injunction restraining Mr Passmore from
making purchases of beer other than in accordance with the tie. On the same
day, Morland issued a summons seeking to strike out Mr Passmore’s claim on the
grounds that it disclosed no reasonable cause of action — alternatively, that
it was otherwise an abuse of the process of the court — and for judgment on the
counterclaim. The grounds of that application appear from two paragraphs of the
affidavit sworn by Morland’s solicitor in support of the application to strike
out:
2. I am advised that as a matter of law the
plaintiff’s claim to rely on Article 85 of the Treaty of Rome is unsustainable
in law because this provision of the Treaty does not give rise to any cause of
action on the part of a tenant in the position of the plaintiff in this case
but only protects competitors…
3. The plaintiff’s claims are, in any event,
unsustainable in fact on the plain facts which are within the public domain in
relation to the size of the UK beer market, and by way of comparison the size
of [Morland’s] tied estate of public houses… [Morland’s] tied estate of
tenanted pubs amounts to approximately 0.19% of the total number of licensed
outlets in the United Kingdom… In my respectful submission it is therefore
plain that the plaintiff’s business cannot be considered as having any
substantial effect on inter-state trade between the member states of the
European Union. Accordingly the whole of the plaintiff’s claim insofar as it
seeks to rely on Article 85 should be struck out.
The first of those grounds was the subject of a
decision handed down by this court in Gibbs Mew plc v Gemmell
[1998] EuLR 588* on 22 July 1998 — that is to say, very shortly after the
judgment of Laddie J in the present case. The conclusion, so far as material,
appears from the following passage at p605F in the judgment of Peter Gibson LJ:
The proposition that a breach of Art 85 gives
rise to a claim by a party to an offending agreement in damages or restitution
has been rejected by the High Court in a series of unreported decisions (Inntrepreneur
Estates v Milne, Mitchell J; Inntrepreneur Estates plc v Smythe,
Sir Peter Pain; Matthew Brown plc and another v Campbell, Mr
Michael Tugendhat QC; Parkes v Esso Petroleum Co Ltd, Sir Richard
Scott V-C; and Trent Taverns v Sykes, David Steel J). In my
judgment those judges were entirely right to do so.
*Editor’s note: Also reported at [1999] 1 EGLR 43
It is accepted on the present appeal that, as the
law stands following the decision in Gibbs Mew, Mr
pursue the claims for damages and restitution made in the writ. The argument
before us has proceeded on the basis Mr Passmore intends, with leave, to add a
claim for a declaration that the tie is void and unenforceable; and that, in
any event, this court must decide whether the judge was right to give judgment
against him on the counterclaim.
In relation to the second of the grounds relied on
in the affidavit in support of the summons to strike out, it is accepted (for
the purposes of this appeal) that it may be assumed that Morland’s tied estate
is so small in relation to the number of on-licensed outlets that a tie in a
lease granted by Morland could not be regarded as having any material effect on
trade within the Common Market; and so could not infringe the prohibition in
Article 85(1). But it is submitted, on behalf of Mr
irrelevant in the present case. The relevant questions are said to be: (i)
whether the tie was prohibited by Article 85(1) during the period that IPCL was
landlord; and, if so, (ii) whether the tie, having been prohibited by Article
85(1) — and so ‘automatically void’ — at the commencement of the tenancy,
remained void after the circumstances that had given rise to the Article 85(1)
prohibition had ceased to exist upon the change of landlord. In that context,
Morland was willing to accept for the purpose of the application before the
judge — and for the purpose of this appeal — that it may be assumed that the
tie contained in clause 2(1) of the first schedule to the draft lease would,
for so long as IPCL was the landlord of the demised premises, have been
prohibited under Article 85(1) — and so would have been void by virtue of
Article 85(2). In those circumstances, it is only the second of those two
questions which falls for decision.
The decision below
The judge held that that question must be answered
in the negative. His reasoning appears from the following passages in the
numbered paragraphs of his judgment:
17. Article 85(1) is concerned with certain
intended or actual economic effects arising out of the operation of agreements
and concerted practices. It does not prohibit a clause of particular form or
language. It only prohibits agreements and concerted practices that have a
particular offensive economic objective or effect. No agreement or clause in an
agreement is per se invalid. It has to be looked at in the factual
environment in which it is operating or intended to be operated…
18. It follows that in a case, as here, that is
advanced on the footing that the agreement has a prohibited effect, it is
necessary to look at and weigh up all relevant economic facts, including
matters such as the size of the parties to the agreement, before it is possible
to say that a breach has occurred. The result of this is that a contract in one
trader’s hands may offend against the article, but the same contract in
another’s may not. This lies behind Mr Passmore’s acceptance that a tie of the
form in this case does not offend in so far as it is in a contract between
Morland and its lessees.
19. This leads to another consequence. As Mr
Green [counsel for Morland] put it, an agreement could commence lawfully and be
unaffected by Article 85(1) because the parties to it are too small to have any
significant economic impact on the market. However, the agreement could subsequently
fall within the article, for instance because one of the parties grows into a
major figure in the market, or because it is taken over by a larger competitor
or even because the nature of the market changes for reasons beyond the control
of the parties. The agreement, or more accurately the economic effect of it,
moves from being outside the scope of Article 85(1) to being within it.
20. If this is so, then one would expect the
nullity created by Article 85(2) only to apply when the offensive economic
effects are being generated by the agreement. In my view, this is what Article
85(2) does. In terms, Article 85(2) only imposes automatic nullity on
agreements and concerted practices that are ‘prohibited’. This is a reference
back to Article 85(1). It is only when a contractual arrangement or concerted
practice offends against the latter that it is prohibited and it is only when
it is prohibited that it is treated as a nullity. It would follow that if an
arrangement or practice is not prohibited it is not a nullity.
The judge expressed his conclusion at para 25 of
his judgment:
25 …The lease between Inntrepreneur and Mr
Passmore created a bundle of contractual obligations between them. As and when
those obligations gave rise to effects prohibited by Article 85(1) they became
a nullity in the sense that they were absolutely unenforceable between the
parties. If and when the effects of the obligations no longer offend, they are
not a nullity and they are no longer unenforceable. The effect of the assignment
by Inntrepreneur to Morland was to pass to the latter the bundle of
obligations. In the assignee’s hands they are admittedly inoffensive. As a
consequence, in those hands they are enforceable.
Prohibition under Article 85(1)
An agreement is within the prohibition imposed by
Article 85(1) if, but only if, two conditions are satisfied. Those conditions
are: (i) that the agreement may affect trade between member states; and (ii)
that the agreement has as its object or effect the prevention, restriction or distortion
of competition within the Common Market. We were referred to a number of cases
in which the position in relation to beer ties has been examined by the Court
of Justice. The first in time is the decision in Brasserie de Haecht v Wilkin
[1967] ECR 407 (Case 23/67) (Haecht
the court by the Tribunal de Commerce, Liege, was whether:
in order to judge whether the contracts in
question are prohibited by Article 85(1) of the EEC Treaty, it is necessary to
take into account the economic context and the whole of the market, that is to
say, in this case, the simultaneous existence of a large number of contracts of
the same type imposed by a small number of Belgian breweries upon a very large
proportion of liquor licensees…
The court identified, at p415 of the report, three
factors against which the prohibition in Article 85(1) must be tested. First,
the constituent elements of the agreements, decisions and concerted practices
that were said to be prohibited must be considered together as a whole. Second,
regard must be had to the effects of those agreements, decisions and concerted
practices in the context in which they occur:
that is to say, in the economic and legal context
of such agreements, decisions or practices and where they might combine with
others to have a cumulative effect on competition. In fact, it would be
pointless to consider an agreement, decision or practice by reason of its
effects if those effects were to be taken distinct from the market in which
they are seen to operate and could only be examined apart from the body of
effects, whether convergent or not, surrounding their implementation. Thus in
order to examine whether it is caught by Article 85(1) an agreement cannot be
examined in isolation from the above context, that is, from the factual or
legal circumstances causing it to prevent, restrict or distort competition. The
existence of similar contracts may be taken into consideration for this
objective to the extent to which the general body of contracts of this type is
capable of restricting the freedom of trade.
Third, it is only to the extent to which
agreements, decisions or practices are capable of affecting trade between
member states that the prevention, restriction or distortion of competition
comes within the prohibition in Article 85(1):
In order to satisfy this condition, it must be
possible for the agreement, decision or practice, when viewed in the light of a
combination of the objective, factual or legal circumstances, to appear to be
capable of having some influence, direct or indirect, on trade between Member
States, of being conducive to a partitioning of the market and of hampering the
economic interpenetration sought by the Treaty. When this point is considered
the agreement, decision or practice cannot therefore be isolated from all the
others of which it is one.
The court answered the question referred in the
following terms at pp416-417:
Agreements whereby an undertaking agrees to
obtain its supplies from one undertaking to the exclusion of all others do not
by their very nature necessarily include all the elements constituting
incompatibility with the Common Market as referred to in Article 85(1) of the
Treaty. Such agreements may, however, exhibit such elements where, taken either
in isolation or together with others, and in the economic and legal context in
which they are made on the basis of a set of objective factors of law or of
fact, they may affect trade between Member States and where they have either as
their object or effect the prevention, restriction or distortion of
competition.
The Court of Justice considered the question again
in Delimitis v Henninger Bräu AG [1991] ECR I-935 (Case 234/89),
on a reference made by the Oberlandesgericht, Frankfurt am Main. The judgment
contains an exhaustive examination of the relevant principles. First, the court
affirmed the view, expressed in its judgment in Haecht I, that beer
supply agreements (or beer ties) were not, per se, anti-competitive —
that is to say, such agreements were not to be regarded as having as their
object the prevention, restriction or distortion of competition within the
Common Market. This appears from the opening paragraphs in that section of its
judgment in which the court examines ‘The compatibility of beer supply agreements
with Article 85(1) of the Treaty’:
10. Under the terms of beer supply agreements,
the supplier generally affords the reseller certain economic and financial
benefits, such as the grant of loans on favourable terms, the letting of
premises for the operation of a public house and the provision of technical
installations, furniture and other equipment necessary for its operation. In
consideration for those benefits, the reseller normally undertakes, for a
predetermined period, to obtain supplies of the products covered by the
contract only from the supplier. That exclusive purchasing obligation is
generally backed by a prohibition on selling competing products in the public
house let by the supplier.
11. Such contracts entail for the supplier the
advantage of guaranteed outlets, since as a result of his exclusive purchasing
obligation and the prohibition on competition, the reseller concentrates his
sales efforts on the distribution of the contract goods. The supply agreements,
moreover, lead to co-operation with the reseller, allowing the supplier to plan
his sales over the duration of the agreement and to organise production and
distribution effectively.
12. Beer supply agreements also have advantages
for the reseller, inasmuch as they enable him to gain access under favourable
conditions and with the guarantee of supplies to the beer distribution market.
The reseller’s and the supplier’s shared interest in promoting sales of the
contract goods likewise secures for the reseller the benefit of the supplier’s
assistance in guaranteeing product quality and customer service.
It was from the position as stated in those
paragraphs that the Court of Justice went on, in Delimitis, to analyse
the circumstances in which beer supply agreements do have the effect of preventing,
restricting or distorting competition. It pointed out, at para 14 of the
judgment, that the court had held, in its decision in Haecht I, that the
effects of such agreement had to be assessed in the context in which they
occur. It went on:
15. Consequently, in the present case it is
necessary to analyse the effects of a beer supply agreement, taken together
with other contracts of the same type, on the opportunities of national
competitors or those from other Member States, to gain access to the market for
beer consumption or to increase their market share and, accordingly, the
effects on the range of products offered to customers.
The court identified, as the relevant market in
the present context, the national market for beer distribution in premises for
the sale and consumption of drinks (on-licensed premises). The court referred
to the factors that needed to be examined in order to assess whether the
existence of a bundle of beer supply agreements did impede access to the
relevant market. It pointed out that:
19 …The effect of those networks of contracts on
access to the market depends specifically on the number of outlets thus tied to
national producers in relation to the number of public houses which are not so
tied, the duration of the commitments entered into, the quantities of beer to
which those commitments relate, and on the proportion between those quantities
and the quantities sold by free distributors.
Other factors were identified at paras 21 and 22
of the court’s judgment in Delimitis. It is not necessary to rehearse
them in detail. It is enough to note that they are factors that require
examination of matters that may be expected to be in a state of continuous
change. By way of example:
21 …The presence of beer wholesalers not tied to
producers who are active on the market is also a factor capable of facilitating
a new producer’s access to that market since he can make use of those
wholesaler’s sales networks to distribute his own beer.
The court explained, at para 23 of the judgment, that
if on an examination of the bundle or network of similar contracts effective in
the relevant market, it was found that those agreements, taken together, did
not have the cumulative effect of denying access to that market to new national
or foreign competitors, the separate agreements that made up the bundle could
not, individually, be held to restrict competition within the meaning of
Article 85(1); and so could not fall within the prohibition. But the court went
on to consider the position if examination of the cumulative effect of the
bundle or network of agreements did lead to the conclusion that the market was
difficult to penetrate. In such a case it was necessary to assess the extent to
which the agreements entered into by the brewery in question contributed to the
cumulative effect. The court pointed out that:
24 …Under the Community rules on competition,
responsibility for such an effect of closing off the market must be attributed
to the breweries which make an appreciable contribution thereto. Beer supply
agreements entered into by breweries whose contribution to the cumulative effect
is insignificant do not therefore fall under the prohibition under Article
85(1).
In assessing the extent to which the beer supply
agreements entered into by a particular brewery contributed to the closing-off
of the relevant market, it was necessary to take into account the market
position of the contracting parties (para 25) and the duration of the
individual contracts entered into by that brewery (para 26).
With these principles in mind, the Court of
Justice gave the following ruling (so far as material) in answer to the
questions put to it in Delimitis at p999:
1. A beer supply agreement is prohibited by
Article 85(1) of the EEC Treaty if two cumulative conditions are met. The first
is that, having regard to the economic and legal context of the agreement in
issue, it is difficult for competitors who could enter the market or increase
their market share to gain access to the national market for the distribution
of beer in premises for the sale and consumption of drinks. The fact that, in
that market, the agreement in issue is one of a number of similar agreements
having a cumulative effect on competition constitutes only one factor amongst
others in assessing whether access to that market is indeed difficult. The
second condition is that the agreement in issue must make a significant
contribution to the sealing-off effect brought about by the totality of those
agreements in their economic and legal context. The extent of the contribution
made by the individual agreement depends on the position of the contracting
parties in the relevant market and on the duration of the agreement.
I have thought it appropriate to set out passages
from the judgments of the Court of Justice in Haecht I and in Delimitis
at some length because, as it seems to me, those passages establish beyond
argument that Laddie J was correct in his view that Article 85(1) only
prohibits agreements and concerted practices that have a particular offensive
economic objective or effect; and that, in order to decide whether it is within
the prohibition, each agreement, or clause in an agreement, has to be examined
in the factual context in which it is to be operated. The judge was plainly
right to hold that, before it was possible to reach the conclusion that, as
between the parties, a particular beer supply agreement was prohibited by
Article 85(1), it was necessary to assess all relevant economic facts,
including matters such as the market share of the supplier and the number and
the duration of the supply agreements to which it was party, as at the time or
times in respect of which the question fell to be decided.
It follows that an agreement that is not within
Article 85(1) at the time when it is entered into — because, in the
circumstances prevailing in the relevant market at that time, it does not have
the effect of preventing, restricting or distorting competition — may,
subsequently and as the result of a change in those circumstances, come within
Article 85(1) because, in the changed circumstances, it does have that effect.
Two examples may be taken to illustrate the point.
First, it may be that, at the time when the
agreement is entered into, there are a sufficient number of beer wholesalers
not tied to producers that a new producer can penetrate the market without
difficulty by using the sales networks of those wholesalers — see para 21 in
the Delimitis judgment. But, subsequently, that number is significantly
reduced; because, say, conditions in the market are such that existing
wholesalers find that they must either enter into brewery ties or cease
business. So that, at the time in respect of which the question falls to be
decided, the market cannot be penetrated without difficulty — leading to the
conclusion that the first limb of the test formulated by the Court of Justice
in its answer to the question referred in the Delimitis case is
satisfied.
Second, it may be that, at the time when the
agreement is entered into, the market share of the brewery is so small that the
agreements into which it has entered (taken together) make no appreciable
contribution to the closing-off (or foreclosure) of the relevant market — see
para 24 in the Delimitis judgment. But, subsequently, the market share
of the brewery increases; perhaps as the result of the acquisition of a further
block of tied outlets, or following a merger, or as the result of other
breweries going out of the market. So that, at the time in respect of which the
question falls to be decided, the market share of that brewery is sufficiently
large that (taken together) the beer ties in its supply agreements do make an
appreciable contribution to the foreclosure of the market — leading to the
conclusion that the second limb of the Delimitis test is satisfied.
It must follow, also, by a parity of reasoning,
that an agreement that is within the prohibition in Article 85(1) at the time
when it is entered into — because, in the circumstances prevailing in the
relevant market at that time, it does have the effect of preventing,
restricting or distorting competition — may, subsequently and as the result of
a change in those circumstances, fall outside the prohibition contained in that
Article because, in the changed circumstances, it no longer has that effect.
The point could be illustrated by examples similar to those already given; but
it is unnecessary to do so.
Meaning and effect to be given to Article
85(2)
Article 85(2) has to be construed in conjunction
with Article 85(1). In particular, Article 85(2) has to be construed in the
light of an appreciation that the prohibition in Article 85(1) is not an
absolute prohibition; but rather a prohibition that arises when, and continues
for so long as (and only for so long as), it is needed in order to promote the
freedom of competition within the Common Market, which is the stated objective
of Article 85(1). The prohibition is temporaneous (or transient) rather than
absolute; in the sense that it endures for a finite period of time — the period
of time for which it is needed — rather than for all time. With this in mind
the question of construction to which the language used in Article 85(2) gives
rise may be stated in these terms: does Article 85(2) mean that ‘any agreements
or decisions while prohibited pursuant to Article 85(1) shall be
automatically void’; or does it mean that ‘any agreements or decisions once
prohibited pursuant to Article 85(1) shall thereafter be automatically
void’.
In support of the contention that Article 85(2)
should be given a meaning that limits its effect to the period during which the
prohibition imposed by Article 85(1) is in force, we were referred to two
decisions of the Court of Justice on the question of whether the effect of
Article 85(2) is to make void the whole of an agreement that contains a
provision that is prohibited by Article 85(1); that is to say, whether the
effect of Article 85(2) is to make void other provisions in the agreement that,
if they stood alone, would not themselves be prohibited by Article 85(1). It
is, I think, pertinent to note the submission made on behalf of the commission
in the first of those cases, Société Technique Minière v Maschinenbau
Ulm GmbH [1966] ECR 235 (Case 56/65), at pp245-246:
The Commission further submits that, since
Article 85(1) does not state that the nullity must be governed by the rules
which are to be followed for applying the prohibition, in determining the
extent of the civil sanction laid down by Article 85(2) one must refer to the
purpose of the rules on competition on the basis of an interpretation founded
on the objectives of Community law. In ensuring that these objectives are
pursued and that Articles 85(1) and 85(3) are observed, it is not necessary for
the sanctions of civil law to strike out those parts of the agreement which are
not contrary to the said Article.
The Advocate General, Mr Roemer, adopted the same
approach. The relevant passage in his opinion appears at p259 of the report:
Thus it seems to be established in principle that
the only parts of an agreement which can be struck down by the nullity imposed
by Article 85(2) are those which bring about a restriction on competition and
which must be considered as the decisive causes of an interference with
compassion. I do not think the acceptance of wider effects would be justified…
The Court of Justice agreed. The judgment contains
the following passage at p250:
Article 85(2) provides that ‘Any agreements or
decisions prohibited pursuant to the Article shall be automatically void’.
This provision, which is intended to ensure
compliance with the Treaty, can only be interpreted with reference to its purpose
in Community law, and it must be limited to this context. The automatic nullity
in question only applies to those parts of the agreement affected by the
prohibition, or to the agreement as a whole if it appears that those parts are
not severable from the agreement itself. Consequently any other contractual
provisions which are not affected by the prohibition, and which therefore do
not involve the application of the Treaty, fall outside Community law.
The analogy, it is submitted, is that automatic nullity
only applies to the relevant provision in the agreement for so long as it is
affected by the prohibition. During any period that the relevant provision is
not affected by the prohibition — because the circumstances during that period
are such that the provision does not then have as its effect the prevention,
restriction or distortion of competition within the Common Market — the
provision calls for no application of the Treaty and falls outside community
law.
The Court of Justice reached a similar conclusion
in Société de Vente de Ciments et Bétons de l’Est SA v Kerpen &
Kerpen GmbH & Co [1983] ECR 4173 (Case 319/82). The first question
referred by the Oberlandesgericht, Saarbrucken, was whether a contract that
imposed upon the buyer an obligation to use the goods supplied for his own
needs, not to resell the goods in a specified area and to consult the seller
before soliciting business in another specified area, had as its object the
prevention of competition within the Common Market within the prohibition in
Article 85(1). The court held that it did. The court went on at pp4183-4184:
10. In the second and third questions the
national court asks what are the consequences of the nullity of such a contract
under Article 85(2) of the Treaty, in particular in relation to orders and
deliveries made on the basis of the contract.
11. In its judgment of 25 November 1971 in Case
22/71 (Béguelin Import Company and Others v SAGL Import-Export and
Others [1971] ECR 949), the Court ruled that an agreement falling under the
prohibition imposed by Article 85(1) of the Treaty is void and that, since the
nullity is absolute, the agreement has no effect between the contracting
parties. It also follows from previous judgments of the Court, and in
particular from the judgment of 30 June 1966 in Case 56/65 (Société
Technique Minière v Maschinenbau Ulm GmbH [1966] ECR 235), that the
automatic nullity decreed in Article 85(2) applies only to those contractual
provisions which are incompatible with Article 85(1). The consequences of such
nullity for other parts of the agreement are not a matter for Community law…
12. The answer to the second and third questions
must therefore be that the automatic nullity decreed by Article 85(2) of the
Treaty applies only to those contractual provisions which are incompatible with
Article 85(1)…
It was submitted, on behalf of Mr Passmore, that
effect must be given to the observation, in para 11 of the judgment in Kerpen,
that the ‘nullity is absolute’. But that phrase must be read in context. The
Court of Justice was not addressing the question in the present case. It is
clear from the court’s reference to the decision in the Société Technique
Minière case that it was affirming that the automatic nullity applied to
the provisions of the agreement only in so far as they were prohibited by
Article 85(1). On a proper reading of the passage that I have set out, the
observation does, I think, support the view that, as a matter of community law,
the nullity imposed by Article 85(2) is an exact reflection of the prohibition
imposed by Article 85(1). If the prohibition is temporaneous (or transient)
then so is the nullity.
Interrelation between Article 85(2) and
Article 85(3)
Article 85(3) gives the commission power to
declare the provisions of Article 85(1) inapplicable in the case of any
agreement (specific exemption) or category of agreements (block exemption)
provided the qualifying conditions set out in the Article are satisfied. That
power has led to consideration by the Court of Justice of the status of the
agreement between the time that it is made — or the time, if later, when the
circumstances in which it operates are such that it first falls within the
prohibition in Article 85(1) — and the time when the commission declares
Article 85(1) to be inapplicable. There is an obvious conceptual difficulty if
the effect of Article 85(2) is to make the relevant provision absolutely void
for all time; because there is then no longer any relevant provision in respect
of which the power conferred by Article 85(3) can be exercised at the time when
the commission comes to consider the matter. In order to understand the way in
which the court has dealt with the point, it is necessary to have in mind the
relevant provisions in the Council Regulation by which Article 85 was
implemented.
Article 85 of the EC Treaty was implemented within
the community by Council Regulation 17 of 6 February 1962. Article 1 of
Regulation 17 is in these terms:
Without prejudice to Article 6, 7 and 23 of this
Regulation, agreements, decisions and concerted practices of the kind described
in Articles 85 (1) of the Treaty… shall be prohibited, no prior decision to
that effect being required.
Article 4(1) requires that agreements of the kind
described in Article 85(1) of the Treaty that come into existence after the
entry into force of the regulation (‘new agreements’) and in respect of which
the parties seek a declaration under Article 85(3), must, unless exempted under
Article 4(2), be notified to the commission; and no decision under Article
85(3) may be taken until the agreement has been notified. Article 6(1) provides
that, whenever the commission takes a decision pursuant to Article 85(3) of the
Treaty, it shall specify the date from which the decision shall take effect;
but (in a case to which Article 4(1) of the regulation applies) that date shall
not be earlier than the date of notification. The effect, therefore, in
relation to those new agreements that (in all the circumstances relevant to
prevention, distortion or restriction of competition within the Common Market)
are or will be notifiable as soon as they come into operation, is that they
must be notified before they come into operation. If they are not notified
before they come into operation, there will, inevitably, be a period — between
the date on which the agreement comes into operation and the date of
notification — in respect of which the agreement will be void, notwithstanding
any subsequent exercise of the power under Article 85(3).
Article 4(1), and the related provision in Article
6(1), do not apply to agreements where the only parties to the agreement are
undertakings from one member state and the agreement does not relate either to
imports or to exports between member states — see Article 4(2)(i). A standard
beer supply agreement is an example of an agreement exempted from notification
by Article 4(2)(i).
Nor does Article 4 of Regulation 17 apply to
agreements, decisions or concerted practices of the kind described in Article
85(1) of the Treaty that were already in existence at the entry into force of
the regulation (‘old agreements’). In the case of old agreements, Article 5(1)
requires that parties seeking a declaration under Article 85(3) must notify the
agreement to the commission before 1 November 1962 (or, where there are only
two undertakings party to the agreement, before 1 February 1963). Where an old
agreement has been notified to the commission before the specified date, the
restriction in Article 6(1) does not apply — see Article 6(2) — so that, if the
commission subsequently takes a decision under Article 85(3) to disapply
Article 85(1), it may specify that that decision shall have effect from the
entry into force of the regulation. Further, neither Article 5(1) nor Article
6(1) apply to old agreements that satisfy the conditions set out in Article
4(2). But, in other cases, if the old agreement is not notified before the
specified date, then Article 6(1) prevents the decision under Article 85(3)
from having effect before the actual date of notification. So, again, there
will (at
the regulation and the date of notification in respect of which the agreement
will be void, notwithstanding any subsequent exercise of the power under
Article 85(3).
Article 7(1) contains special provisions
applicable to old agreements that are notified within the time limited by
Article 5(1) but that fail to satisfy the requirements of Article 85(3) of the
Treaty. It is in these terms:
7(1) Where agreements, decisions and concerted
practices in existence at the date of entry into force of this regulation and
notified within the limits specified in Article 5(1) do not satisfy the
requirements of Article 85(3) of the Treaty and the undertakings or
associations of undertakings concerned cease to give effect to them or modify
them in such manner that they no longer fall within the prohibition contained
in Article 85(1) or that they satisfy the requirements of Article 85(3), the
prohibition contained in Article 85(1) shall apply only for a period fixed by
the Commission…
The same special provisions are extended, by
Article 7(2), to old agreements that, being within Article 4(2), are not
notifiable under Article 5(1); provided that they are notified before 1 January
1967. It is plain that the purpose of those special provisions is to enable the
commission to direct that, in the case of an old agreement that has been
awaiting a negative clearance or a decision under Article 85(3) — which, in the
event, is not forthcoming — that the prohibition contained in Article 85(1)
shall not operate until the relevant undertakings have had an opportunity to
discontinue or modify the infringing provisions in the agreement.
Article 8(1) of Regulation 17 requires a decision
under Article 85(3) of the Treaty to be issued for a specified period and
enables conditions and obligations to be attached thereto. Article 9(1)
provides that the commission has sole power to declare Article 85(1)
inapplicable pursuant to Article 85(3).
It was against the structure of Regulation 17 that
the Court of Justice had to consider the questions referred to in Brasserie
de Haecht v Wilkin (No 2) [1973] ECR 77 (Case 48/72) (Haecht II).
Those questions included:
3. Is the nullity of contracts exempted from
notification to be deemed to take effect from the date when one of the
contracting parties duly brings an action for it or merely from the date of the
judgment or decision of the Commission which establishes it?
In that context ‘contracts exempted from
notification’ were beer supply agreements entered into in 1963 (so ‘new
agreements’) that were exempted from notification under Article 4(1) of
Regulation 17 because they fell within Article 4(2). The court decided that the
nullity provided for in Article 85(2) was automatic. It did not have effect
only from the date of the judgment or decision in which it was subsequently
established that the agreement was within the prohibition in Article 85(1); but
from the date on which, on a proper assessment of the relevant facts, it first
fell within the prohibition. In reaching that conclusion the court set out
certain general considerations with regard to the questions posed. First, the
court identified the problem in the following paragraphs of its judgment (at
p86 of the report):
2. By Article 85(2) the Treaty has, from its
entry into force, rendered any agreements or decision prohibited pursuant to
this Article automatically void.
3. Although the prohibition set out in Article
85(1) is modified by the power of granting exemptions provided for in Article
85(3), the Treaty does not however contain any transitional provision as to the
effects of Article 85(2) on agreements and decisions existing at the entry into
force of either the Treaty or of Regulation No 17.
4. This omission leads to a situation all the
more ambiguous from the fact that, apart from the possible intervention by the
Commission by virtue of the regulations and directives referred to in Article
87, the judiciary, by virtue of the direct effect of Article 85(2), is
competent to rule against prohibited agreements and decisions by declaring them
automatically void.
5. While the first course offers the necessary
flexibility to take the peculiarities of each case into account, Article 85(2),
the intention of which is to attach severe sanctions to a serious prohibition,
does not of its very nature allow the Court the power to intervene with the
same flexibility.
6. Whilst, in defining the powers of the
Commission, Regulation No 17, and in particular Article 7 thereof, enabled the
Commission to take into account the general principle of legal certainty, it
did not modify — as indeed it could not — the effects of Article 85(2), but on
the contrary, by Article 1 thereof, it confirmed that, without prejudice to
Articles 6, 7 and 23 thereof agreements, decisions and concerted practices of
the kind described in Article 85(1) should be prohibited, no prior decision to
that effect being required.
7. Thus it was left entirely to the judgment of
the courts to determine the lines on which the legal application of Article
85(2) should be reconciled with respect for the said general principle of legal
certainty.
The ‘general principle of legal certainty’, as I
understand it, is a reference to the need for those engaged in trade to base
their decisions and actions on an informed evaluation of the circumstances as
they are for the time being, without the risk that they will suffer retroactive
consequences if that evaluation is subsequently held to be wrong. In context,
the problem was that the parties might operate an agreement while awaiting
negative clearance or an Article 85(3) exemption from the commission, only to
find that, as a result of a decision of a national court, the agreement had to
be treated as void from the outset.
The Court of Justice held that, in addressing the
problem, a distinction could be made between old agreements and new agreements.
This appears from paras 8 to 10 of the judgment:
8. There is, therefore room for distinction, in
applying Article 85(2) between agreements and decisions existing before the
implementation of Article 85 by Regulation No 17, hereinafter called old
agreements, and agreements and decisions entered into after that date,
hereinafter called new agreements.
9. In the case of old agreements, the general
principle of contractual certainty requires, particularly when the agreement is
being notified in accordance with the provisions of Regulation No 17, that the
court may only declare it to be automatically void after the Commission has
taken a decision by virtue of that Regulation.
10. In the case of new agreements, as the
regulation assumes that so long as the Commission has not taken a decision the
agreement can only be implemented at the parties’ own risk, it follows that
notifications in accordance with Article 4(1) of Regulation No 17 do not have
suspensive effect.
The holding in para 9 has the result that
notification of an old agreement has a suspensive effect. The national court
must await the decision of the commission before declaring the agreement void.
The commission may decide to give negative clearance — in which case the
agreement was never ‘automatically void’ because it was never within the
prohibition in Article 85(1); or it may exercise its power under Article 85(3)
with retrospective effect — in which case the agreement, which has been
‘automatically void’ from the outset because, ex hypothesi, until the
exercise of the power, it has infringed Article 85(1), ceases to be, or to have
been, void; or it may exercise its power under Article 7(1) of the regulation
so as to give the undertakings an opportunity to discontinue or modify their
agreement — in which case, again, the agreement that has been ‘automatically
void’ from the outset is not to be void, or to have been void, until the
commencement of a period fixed by the commission. The restraint that prevents
the national court from declaring an old agreement void pending the decision of
the commission gives to that agreement a form of provisional validity during
the period while the commission is deciding whether, and if so how, to exercise
its powers.
But there is no comparable restraint on the power
of the national court to declare a new agreement void during the period of
examination by the commission. This is recognised in paras 11 to 13 of the
judgment in Haecht II:
11. Whilst the principle of legal certainty
requires that, in applying the prohibitions of Article 85, the sometimes considerable
delays by the Commission in exercising its power should be taken into account,
this cannot, however, absolve the court from the obligation of deciding on the
claims of interested parties who invoke the automatic nullity.
12. In such case it devolves on the court to
judge, subject to the possible application of Article 177, whether there is
cause to suspend proceedings in order to allow the parties to obtain the
Commission’s standpoint, unless it establishes either that the agreement does
not have any perceptible effect on competition or trade between Member States
or that there is no doubt that the agreement is incompatible with Article 85.
13. Whilst these considerations refer
particularly to agreements which must be notified in accordance with Article 4
of the Regulation, they apply equally to agreements exempt from notification,
such exemption merely constituting an inconclusive indication that the
agreements referred to are generally less harmful to the smooth functioning of
the Common Market.
The court expressed its conclusion on the third
question referred to it:
24. This question is concerned with whether
nullity by virtue of Article 85(2) of agreements exempted from notification is
deemed to take effect from the date when one of the contracting parties duly
claimed it or merely from the date of the judgment or the decision of the
Commission establishing it.
25. It follows from the general considerations
above that Article 85(2) renders agreements and decisions prohibited pursuant
to that Article automatically void.
26. Such nullity is therefore capable of having a
bearing on all the effects, either past or future, of the agreement or
decision.
27. Consequently, the nullity provided for in
Article 85(2) is of retroactive effect.
In my view, it follows from the provisions of
Regulation 17 and the analysis in the judgment of the Court of Justice in Haecht
II — an examination of which has, I regret, added to the length of this
judgment — that the following propositions are beyond doubt:
1. As soon as the context in which it is operated
brings an agreement within the prohibition in Article 85(1), the agreement (or
the relevant provision in the agreement) is automatically void. It is not
necessary for there to be a decision of the commission or of any court to that
effect.
2. The commission has power, under Article 85(3),
to declare Article 85(1) ‘inapplicable’ to any agreement. If the commission
exercises that power it must specify the date from which its decision takes
effect — Article 6(1) of the regulation. Where that power is exercised, an
agreement that has, up to the exercise of the power, been ‘automatically void’,
ceases to be void with effect from the date specified in the decision
exercising the power.
3. Where the agreement is a new agreement
notifiable under Article 4(1), the date specified in the decision exercising
the power under Article 85(3) must not be earlier than the date of
notification. So, also, where the agreement is an old agreement notifiable
under Article 5(1) but not in fact notified before the prescribed date. So
there will be cases in which the effect of a declaration — under Article 85(3) —
that Article 85(1) is inapplicable will be that the agreement is void for the
period up to the date of notification, but then ceases to be void. And there
may be cases where the agreement is void for the period before some other date
that is specified in the commission’s decision.
4. Further, if the commission exercises the power
conferred by Article 85(3), it must specify the period for which Article 85(1)
is to be inapplicable; and may attach conditions and obligations to the
decision — so that at the end of the period specified or on the failure of the
condition or breach of the obligation, the prohibition under Article 85(1)
revives. In such cases, an agreement that was automatically void until the
exercise of the power, but which — upon the exercise of the power — ceased to
be void with effect from the date specified in the decision, reverts to being
void at the end of the period specified or on the failure of the condition or
breach of the obligation.
5. In the case of an old agreement notified within
the time prescribed in Article 5(1) of the regulation — or, where the agreement
is an exempt agreement, the time prescribed in Article 7(1) — that does not
satisfy the requirements of Article 85(3) the commission has power, under
Article 7(1) of Regulation 17, to fix the period during which the prohibition
in Article 85(1) shall apply. So there will be cases where an agreement that
has been ‘automatically void’ and that is never the subject of a decision under
Article 85(3) ceases to be void; or ceases to be void for a period and then, at
the end of the period, reverts to being void.
These considerations lead to the conclusion that
the concept that nullity under Article 85(2) is temporaneous or transient is in
no way inconsistent with the operation of the scheme for implementing Article
85, which was introduced by Regulation 17. Indeed, in my view, the scheme
depends on that concept.
Principle of legal certainty
It is submitted, on behalf of Mr Passmore, that
the concept of temporaneous or transient nullity ought to be rejected as
inconsistent with the decision of this court in Shell UK Ltd v Lostock
Garage Ltd [1976] 1 WLR 1187. The appeal and cross-appeal in that case
concerned the enforceability of a petrol tie under English domestic law. Lord
Denning MR (dissenting on this point) was prepared to hold (at p1198G) that a
covenant in restraint of trade, valid at the time it was entered into, should
not be enforced if circumstances afterwards arise in which it would be
unreasonable or unfair to enforce it. The other two members of the court
disagreed with that approach. Ormrod LJ said at p1202A-C:
While sympathising with [the] wish to relieve
Lostock temporarily of their obligation to buy only Shell petrol at an
uneconomic price, I do not think that it is possible to achieve this result in
this entirely novel way. There is no authority to support it. It would
introduce into the law an unprecedented discretion in the court to suspend for
a time a term in a contract; the repercussions of this are quite unforeseeable
and unmanageable. For example, it would at once alter the approach of the
courts to covenants in restraint of trade generally, because, if the restraint
could be temporarily suspended when it was operating oppressively, many more
covenants would pass the normal test at the time they were entered into.
Moreover, neither party will be able to know when a covenant is or is not
enforceable, or if temporarily unenforceable, when it becomes enforceable
again.
Bridge LJ took a similar view at p1203F:
I am concerned that, under the new doctrine, the
law can give the covenantor no clear indication at the outset of the extent of
the relief to which he is entitled.
Those passages clearly reflect the concern,
expressed by the Court of Justice in Haecht II, that regard must be had
to what that court described as the general principle of legal certainty. But
the problem is inherent in the application of Article 85(1) of the Treaty. It
was recognised in the opinion of Advocate General Roemer in Haecht I at
p422 of the report:
However, our final solution has not yet been
firmly established. One or two objections remain to be dealt with; they
highlight some pitfalls in the answer arrived at and cannot be disposed of with
a word. It has been alleged that the result of taking into account the beer
distribution agreements made by all the breweries in a Member State for the
purposes of Article 85(1) would be unreasonable uncertainty so far as the law
is concerned, because it is impossible for the parties to any agreements to know
the number and content of all the other agreements (including perhaps foreign
ones) and so foresee the legal consequences of their own agreement. The degree
of uncertainty is heightened by the fact that the restrictive agreements made
by the breweries are subject to continual change: their increase risks
encroaching on the territory of the cartel laws, whilst their reduction removes
them from it. This uncertainty also makes it difficult to limit the spheres of
application of the national cartel rules, on the one hand, and the Community
cartel laws on the other, since only when the number of exclusive dealing
agreements in a Member State has reached a certain level can they present a
threat to trade and thus bring the Community laws into play.
One cannot ignore the difficulties which this
presents, but neither should they be overestimated.
In my view, it has to be recognised that what was
seen, in Shell v Lostock, as a wholly novel doctrine is now
enshrined in community competition law. Agreements are prohibited when and
while they are incompatible with competition in the Common Market and not
otherwise. I do not think it would be right to refuse to give effect to what,
as it seems to me, is the clear purpose and effect of Article 85(1) and (2)
because, in a different context, this court has held that that purpose has no
place in the English domestic law of restraint of trade.
Conclusion
For the reasons that I have given I am satisfied
that the nullity imposed by Article 85(2) has the same temporaneous or transient
effect as the prohibition in Article 85(1). It follows that if, as a result of
a
parties to the agreement, then the agreement between them ceases to be void. In
the present case that occurred when the reversion to the tenancy passed to
Morland. In my view, the judge was entirely correct in the conclusion that he
reached.
It was submitted to us that this was a case in
which the court ought not to reach a decision without seeking a preliminary
ruling from the Court of Justice under Article 177 of the EEC Treaty. For my
part I feel able, in the light of the guidance that the Court of Justice has
given in the judgments to which I have referred, to decide the point with
sufficient confidence in the absence of a ruling. Accordingly, I do not think
it would be appropriate to make a reference in this case.
I would dismiss this appeal.
POTTER and BELDAM LJJ agreed and did not add anything.
Appeal dismissed.
